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Local Currency Facility (LCF)

Objective and Additionality

The LCF will allow IFC to provide financing in local currency for high impact projects in IDA and FCS countries where local currency solutions are underdeveloped or completely missing. This facility is targeted at clients who operate in markets in which currency hedging options are absent or very limited.

The facility is designed to enable IFC to offer local currency loans, while fostering complementarity with existing solutions, such as domestic banks, The Currency Exchange (TCX), central banks, etc. IFC will follow a “solutions hierarchy” when attempting to source local currency for PSW-supported projects. It will first seek to provide the needed currency through existing market solutions, other non-market providers such as TCX, and through existing or new IFC liquidity operations in PSW-eligible countries before resorting to options provided by the LCF (see Figure 5).

This facility would be backed by IDA resources set aside to backstop the LCF so that IFC can provide various operations in local currency. The facility would act as a risk transfer vehicle for IFC operations in PSW-eligible countries only up to the designated allocation of PSW’s resources, indicated as US$400 million. While IFC would continue to hold the credit risk of the underlying loans and investments, the main operations of the LCF would cover the following risks:

Counterparty credit risk.1LCF resources will absorb the counterparty credit losses of IFC’s hedging counterparty if its credit quality does not meet IFC’s standard counterparty criteria or if they are non-traditional counterparties;

Market and credit risk associated with managing short-term liquidity in local currency instruments. The client will cover the expected negative changes in value while the PSW would cover unexpected changes in the value of the local investments into which the proceeds of its bond issuance were temporarily invested until disbursement.

Transfer/convertibility risk. When using local counterparties, IFC will be able to offer a deliverable swap but hedge the market risk with an undeliverable swap obtained offshore; the LCF resources will cover the inability to convert/transfer the currency without a loss when the underlying hedged loan matures.

Open currency/interest rate risk. If market-based solutions are not available, IFC will hedge its currency and interest rate risk with the LCF, and the latter will cover any losses (or receive the gains) related to changes in market rates over the term of the hedged investment. The LCF will be actively managed by IFC on a portfolio basis to facilitate diversification of risks borne by the LCF resources, which may include employing strategies to hedge open risks. Should IFC suffer actual, realized losses on local currency investments undertaken with the LCF, IFC will submit a payout request to IDA for reimbursement of the amount of the loss.2 The LCF will operate on the principle of minimum concessionality and be consistent with the facility’s capital framework, whether IDA acts as a direct counterparty with IFC or another entity that can better play the role.